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Unformatted text preview: Chapter 9 1) Define, classify, and explain the nature of long-lived assets a) Long-lived assets are those that a business retains for long periods of time for use in the course of normal operations rather than for sale. They may be divided into tangible assets (land, buildings, equipment) and intangible assets (including goodwill, patents, and franchises). 2) Apply the cost principle to the acquisition of long-lived assets. a) Acquisition cost of property, plant, and equipment is the cash-equivalent purchase price plus all reasonable and necessary expenditures made to acquire and prepare the asset for its intended use, these assets may be acquired using cash or debt, or through self-construction. b) Expenditures made after the asset is in use are wither expensed or capitalized as a cost of the asset i) Expenditures are expensed if they recur frequently, involve relatively small amounts and do not directly lengthen the assets useful life. These are considered ordinary repairs and maintenance expense. ii) Expenditures are capitalized as a cost of the asset if they provide benefits for one or more accounting periods beyond the current period. This category includes extraordinary repairs, replacement and additions 3) Apply various depreciation methods as future economic benefit are used up over time a) In conformity with the matching principle, the cost of long-live tangible assets (less any estimated residual value) is allocated to depreciation expense over each period benefited by the assets. b) Because of depreciation, the book value of an asset declines over time and net income is reduced by the amount of the expense c) Common depreciation methods include straight-line (a constant amount over time), units-of production (a variable amount over time), and double- declining- balance (a decreasing amount over time). 4) Explain the effect of asset impairment on the financial statements a) When events or changes in circumstances reduce the estimated future cash flows of a long-lived asset below its book value, the book value of the asset should be...
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